Aurobindo Pharma is on track with its endeavor to increase the number of complex/differentiated products. It is developing various products like complex injectables, inhalers, transdermal patches, and biosimilars, which would aid growth in the US business, and create margin expansion opportunities. Being a backward-integrated manufacturer, the company is well-placed to sustain superior profitability. For 9MFY21, revenue grew ~11% yoy to Rs 18,773cr, mainly led by strong growth from US formulations and ARV business. EBITDA margin improved 80bps yoy to 21.6%, led by better gross margin. The company reported 129% yoy surge in net profit due to an exceptional gain of Rs 2,814cr in the quarter. Aurobindo Pharma has a strong pipeline with 146 ANDAs pending for approval, 54 of which are injectables. 87 injectables are already approved; the company plans to file 12-15 injectable ANDAs in the US each year. Furthermore, it has ~300 products under various stages of development. The launch momentum remained healthy in 9MFY21 with 34 products (including 11 injectables). The company has been constantly focusing on deleveraging its balance sheet and, post the sellout of Natrol for US$ 550mn or Rs 4,000cr, the company has become net cash positive in Q3FY21 with net D/E at -0.04x and net cash of US$ 117mn.
In addition to the PLI scheme investments of Rs 3,000cr, Aurobindo plans to augment its capacities in APIs (to invest Rs 800cr over 2-2.5 years) and expects to double its revenues in the next 4-5 years. The progress on complex/vaccine pipeline remains on track and we remain positive on the company’s capabilities to monetize this pipeline over the next few years. The growth outlook for EU, ARVs and RoW markets remains strong with 8-10% revenue CAGR estimated over FY21-23E. The balance sheet is strengthened as it turned net debt free in Dec-20.
Indian Pharma is expected to perform well, led by a robust exports opportunity, supply chain de-risking by global pharma from China, PLI schemes, enhanced specialty drug efforts, and recovery of global pharma demand post COVID. Also, the COVID-led opportunities could be a catalyst in the near term.
On Sep-28 2020, we had initiated coverage on Aurobindo Pharma for the base case target of Rs 861 and bull case target of Rs 921 and our bull case target was achieved in Dec 07, 2020.
Given strong growth outlook for pharmaceutical sector and healthy numbers for 9MFY21, we have increased target prices for the stock. The company is progressing well on (i) the vaccine opportunity, (ii) expanding the Injectables portfolio, and (iii) building the biologics portfolio.
With a dedicated focus on me-too generics, the company has already emerged as the second-largest US-generic company in terms of Rx dispensing (with US$ 1.6bn US sales in FY20, i.e., 50% of its total sales) and the seventh-largest generic company globally
View & Valuation:
Strong growth outlook for the US business is driven by improving traction from the generic Injectables space (with comparatively low competition), a healthy product pipeline, and expected traction in recently launched products. European business is also on the path to recovery with demand normalizing. In the long term, Aurobindo is looking to build a presence in the specialty segment, including biosimilars, oncology inhalers, and transdermal patches, which are likely to drive growth. It has a strong advantage of being a low-cost producer with one of the largest product portfolios. Over the years, its dependence on API has consistently reduced with ~90% of its revenue currently coming from formulations. We estimate 6% revenue CAGR, led by both US and EU business, while API and ARV segments would register steady growth over FY20-23E. Operating margin may expand 110bps yoy to 22.2% in the same period. We expect 10% CAGR in net profit, led by steady margin and lower finance costs. We remain positive on Aurobindo on the back of (a) strong complex injectables (manufacturing capabilities/capacity), (b) healthy business of API over three years, (c) improving profitability of the European business, (d) catering the vaccine opportunity over the medium term, and (e) reduced financial leverage.
While regulatory compliance remains an overhang for Aurobindo’s US base business (5 facilities under OAI classification), its diversified US FDA-approved manufacturing network (of 8 API and 11 formulations facilities) and pipeline of oral solids and injectables should support approvals and growth in the near-term. Margin improvement at acquired Apotex business in EU and Covid vaccine supplies in India/EMs could drive earnings in the medium term. Its investments and progress in complex segments provide significant comfort on growth beyond FY22/FY23 with estimated revenue contribution (across geographies) of US$ 350-400mn in FY24, ramping up to US$ 550-600mn in FY25.
Possible (though no official announcement so far) demerger of Injectables business could hasten the value unlocking process. We believe that investors can buy the stock at LTP and add more on dips to Rs 876 for base case fair value of Rs 1,104 (17x FY23E EPS) and bull case fair value of Rs 1,168 (18x FY23E EPS) over the next two quarters.
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