Aurobindo Pharma: Right formulation

The stock of Aurobindo Pharma gained sharply last month, when the company reported that it had received the final approval from the US-FDA to manufacture and market Rosuvastatin tablets in the US. Rosuvastatin is used in treating high cholesterol levels.

The company is eligible for 180 days of generic drug shared exclusivity. This is the latest in the series of approvals, having received 10 final approvals for Abbreviated New Drug Application (ANDA) in the current fiscal for a combination of injections and tablets.

Investors with a two to three-year time horizon can consider buying the stock, considering the company’s growth outlook. The stock now trades at ₹792 and is down 11 per cent from its December 2015 highs, despite the run-up last month. It is available at 23 times its trailing 12-month earnings, a 10 per cent premium to its three-year average.

The premium can be justified, as a turnaround in the European business, strong push in the US, healthy operating metrics, and falling debt levels can provide a leg-up to revenue and margins .

In the last two years, the company has scaled up through overseas acquisitions. In April 2014, it completed the purchase of select western European businesses from Actavis, a US-based pharma major.

Since the takeover, the company has managed to turnaround its European acquisition with net profit recorded last fiscal. Transfer of select product manufacturing to facilities in India enabled the company to rein in costs. .

According to news reports, the company is in the race to acquire Teva Pharmaceutical’s European assets in the UK, Ireland and a few other European nations. If the acquisition happens, the company may take on debt and near-term margins may come under pressure. But it should growth in the long run.

In December 2014, through its US subsidiary Aurobindo Pharma USA Inc, it concluded the acquisition of assets of nutritional supplement maker, Natrol, for $132.5 million. Last fiscal, Natrol’s top-line grew around 15 per cent to $ 110 million. Over the next few years, the management expects to maintain growth around the 15 per cent range, while the bottom line is expected to grow at a slightly higher rate.

The company has also been aggressively filing ANDAs and Drug Master Files (DMFs) applications with regulators. As of June 30 it had received 228 final approvals, 41 tentative approvals with 134 under review.

In addition, the company expects to start filing for approvals in the US over the next four to six quarters on product categories such as hormones and oncology.

Its two facilities in Andhra Pradesh (non-antibiotics, solid orals) and Telangana (antibiotics and injectables) are expected to come on stream shortly, providing boost to its growth plans.

To support these initiatives, the company expects to spend ₹1,200 crore on capex for this year and ₹500 crore in the next.

With around 87 per cent of its sales derived from exports, compliance plays a large role. While the company had faced headwinds in 2010, it has managed to improve its regulatory track record since.

In the last fiscal, formulations brought in 80 per cent of the revenue with the US and Europe contributing 44 and 22 per cent share respectively.

While active pharmaceutical ingredients (API) contribute the remaining 20 per cent, around 75 per cent of these are used in-house for its formulations business. This provides the company better control over cost and quality.

Over the last few years, spends on research and development have remained at around 4 per cent of sales.

For the full year 2015-16, total operating income was up about 15 per cent Y-o-Y to ₹13,896 crore. Lower employee benefits resulted in net profit growth at a stronger 26 per cent to ₹1,982 crore. Growth in operating margins though was muted and remained at around 23 per cent.

The majority of the company’s debt is denominated in foreign currency and net debt stood at $584 million in March 2016 versus $639 million in the previous year. As of March 2016, the company’s debt-to-equity ratio was 0.58 times, down from 0.75 times in the previous fiscal.

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