Aurobindo Pharma: Injecting growth - Buy

The company’s prospects look promising, with the growing injectables pipeline in the US and better portfolio mix

Despite good September quarter earnings, the stock of Aurobindo Pharma plummeted around 13 per cent after the announcement of results. The fall in the stock price was likely due to the gloomy near-term growth outlook of the company and also the weak sentiment that has engulfed the pharma sector due to regulatory clampdown.

However, investors with a long-term horizon can consider buying the stock, given the company’s healthy long-term growth outlook. The stock now trades at ₹708, down 12 per cent from its highs in early November. It quotes at 17 times its trailing 12-month earnings, a 13 per cent discount to its three-year average.

Over the medium-to-long term, the company’s growth prospects look promising, given its growing injectables pipeline in the US, improving profitability in Europe and the ramp up in ARV (drugs treating HIV) business. In the September 2017 quarter, the company reported a good set of numbers; 18 per cent and 29 per cent year-on-year growth in the consolidated revenue and net profit, respectively. This was driven by higher Renvela (Sevelamer Carbonate) sales and improving growth in the Europe business. Aurobindo Pharma capitalised on the sales of Renvela (prescribed for chronic kidney disease) as it was the first generic company to receive US FDA approval in July 2017 to market the product in the US.

However, going ahead, sales from Renvela could decline due to increased competition (currently it has become a five-player market).

R&D strength

The approval for Renvela has proved the company’s mettle in the R&D space and the ability to move up the complexity curve. The company has, in the past, also received approvals for complex drugs such as Intergrelin (for treating acute coronary syndrome), Merrem (anti-bacterial), Tricor (cholesterol) and Angiomax (anti-coagulant).

However, in the near term, there seems to be lack of such lucrative launches except Fondaparinux (anti-coagulant), Vancomycin (antibiotic) and Etanercept (autoimmune diseases).

Sustainable US business

Despite challenges such as regulatory embargo on some units in earlier years, Aurobindo Pharma has grown rapidly in the key US market (currently accounts for 47 per cent of total revenue). This has been aided by several launches in diverse categories, including injectables, ophthalmics, specialty products and controlled substances (current ANDA filings are at 463).

However, the recent years have seen moderation in US revenue growth due to increasing competition and pricing pressure, especially in the oral solid business. Despite 10-12 per cent price erosion in the oral solid business, the management is confident of strong volume growth in its existing portfolio, new launches and ramp-up of injectable business which would support growth of the US business. Aurobindo Pharma is better placed to ride out a challenging environment for generic companies in the US, given its relatively low product concentration, clean compliance slate, portfolio mix and improving pipeline, especially in injectables.

The price risk in the US is relatively lower for Aurobindo Pharma compared to peers, given its diversification into drugs and molecules. Nosingle product contributes more than 3 per cent of sales. This is unlike in the case of Sun Pharma and Lupin, whose top three products accounted for 20-25 per cent of the US sales.

Going forward, Aurobindo expects significant growth in injectables in its US business. Injectable drugs are complex in nature. The injectable business is estimated to have market size of $8 billion in US generics market.

Among Indian players, Aurobindo Pharma has a high number of products (49 approved, 2 with tentative approval and 29 under review) in its injectables portfolio.

The management has indicated that the injectables portfolio will drive growth from the December quarter onwards and has indicated 40-50 per cent growth in FY-18 in this space.

Improving Europe business

The company’s Europe business has gained traction significantly over the last few years, driven by tenders, especially from large markets such as the UK, France and Germany. The Europe business accounts for a fourth of the overall revenue. Over the years, the company has been on an expansion mode in Europe through the inorganic route. It has transferred 74 out of 114 products from Europe to India as of September 2017.

Profitability in the Europe business should continue to improve as shifting the products to India should aid margins in the medium-to-long term.

Ramp up in ARV business

The antiretroviral (ARV) business (drugs treating HIV) of the company has been under pressure due to delayed offtake by customers; this is expected to be normalised over the next few quarters. Approval of a triple combination drug could provide an upside to the company. It has received a two-year contract from Global Funds starting April 2018, with a tender value of $80 million. Currently, the ARV business contributes around 5 per cent to the total revenue.

Debt reduction

With several acquisitions and the company in expansion mode, debt has increased over the years. But the debt-to-equity ratio is now at a comfortable 0.5 times. The management has indicated that debt will be around $475 million in FY-18 against $439 million in FY-17.

The company’s consolidated revenue grew 7 per cent y-o-y in FY-17 to ₹15,206 crore while profit grew 14 per cent to ₹2,301 crore. Operating margin was almost flat at 22.8 per cent in FY-17. In the first half of 2017-18, the consolidated net sales was ₹7,975 crore, growing 7.5 per cent over the same period last year. Consolidated net profit was ₹1,299.6 crore, up 9.2 per cent y-o-y.

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