Aurobindo Pharma: Good medium to grow

Despite a reasonably healthy show in the September quarter, the stock of Aurobindo Pharma’s fell significantly. It is, however, up 19 per cent from our previous recommendation in November 2017.

The company’s growth prospects look robust in the medium to long run. The stock is still attractive from a valuation perspective, and trades at a significant discount to peers. At the current price of ₹803, the stock trades at about 15 times its likely per share earnings for 2019-20, compared to 20-plus times that peers such as Lupin, Sun Pharma, Cipla and Dr Reddy’s enjoy.

Aurobindo is attractively placed to deliver sustainable growth over the next two to three years, given the multiple growth drivers in its US and European operations, improving profit visibility in growth markets and its antiretroviral business. Investors with a long-term horizon can consider buying the stock at current levels.

Growing US presence

Over the years, Aurobindo has been taking the inorganic route to expand and enhance its product portfolio offerings in key therapeutic areas across the globe. Recently, the company entered into an agreement with US-based Sandoz to acquire its US dermatology and oral solid businesses for $900 million. This deal is likely to add approximately 300 products to Aurobindo’s portfolio.

The acquisition is expected to be closed in CY19. After that, the company will become the second largest generic player (based on prescriptions) and the second largest dermatology player in the US. The generic derma business has been a strong profit driver in the US. The management expects the acquisition will bring annual net sales of $900 million. Though there will be significant debt addition due to the recent deals, the company is well-placed to manage this by consistent and incremental cash flows. At present, the company has a comfortable net debt-to-equity ratio of 0.4, as on FY18.

Currently, the company’s US business accounts for 47 per cent of the total revenue. While many major pharma players are struggling to do business in the US, Aurobindo has been gaining volumes in US, thanks to its low product concentration and strong pipeline across therapeutic areas.

The management is confident of strong volume growth in its existing portfolio, new launches and ramp-up of injectables in its US business. While there is immense pricing pressure seen in the oral solids space, the company is well-positioned to grow its revenue, going ahead, with a total 510 ANDA filings (as of September 2018). The management expects US filings to remain healthy at 40-50 per annum over the next five years.

Among Indian players, Aurobindo has the largest number of products in its injectables portfolio, which are expected to be strong growth drivers in the US going ahead. The management has guided for 30 per cent growth in injectables for FY19 on the back of continuous traction from ertapenem injection (anti-infective), besides a few other launches.

In the medium-term road map (from 2019-2021), Aurobindo has indicated that it will focus on launching oncology, respiratory, complex injectables and topical products in the US.

Traction in Europe business

The company’s Europe business (contributes 26 per cent of total revenue) has gained traction significantly over the last few years, driven by tenders, especially from large markets such as the UK, France and Germany. The management has guided for 8-10 per cent growth in Europe over the next few years.

Recently, the company also acquired Canada-based Apotex businesses in five European countries (Poland, Czech Republic, the Netherlands, Spain, and Belgium) for around €74 million. This acquisition will add 200 generics and more than 80 OTC products that had total sales of €133 million in FY18. The acquisition is expected to be completed by FY19-end, which would lead to further growth in the EU.

The company has transferred 97 products pertaining to Europe to India. Profitability in the European 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 is gaining traction, barring dolutegravir (DTG) triple combination drug, which is facing issues due to certain side-effects. Currently, the ARV business contributes around 5 per cent to the total revenue.

Aurobindo has maintained its guidance for R&D spends at 5 per cent of sales in FY19.

Financials

In the first half of 2018-19, Aurobindo’s consolidated net sales was ₹8,849 crore, up 11 per cent over the same period last year.

Consolidated net profit was ₹1,067 crore, down by 18 per cent Y-o-Y.

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