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Weak US sales hits performance

Aurobindo Pharma’s (Aurobindo) Q1FY22 performance was below estimate due to decline in US sales, although EBITDA margin was stable. Revenues declined 3.8% YoY to Rs57.0bn owing to decline in US and ARV sales, EBITDA margin was flat at 21.2% (I-Sec: 20.8%) due to lower S,G&A expenses and adjusted net profit declined 2.4% YoY to Rs7.5bn (I-Sec: Rs7.8bn). US sales was down 7.4% QoQ due to increased price erosion and higher inventory level in the system.

We remain positive on Aurobindo’s long-term outlook considering its strong US pipeline with potential to launch more than 20 products every year, rising share of injectable sales, significant balance sheet improvement and investments into new segments for future growth (biosimilars, vaccines, APIs etc.). Recent correction has made valuation attractive, retain ADD.

* Revenue impacted by increased price erosion in US: Aurobindo’s US revenues declined 7.4% QoQ to US$364mn below estimated US$397mn. Injectable sales also dropped 8.8% QoQ as demand for elective surgeries remained weak. Aurobindo has launched 5 products in the US during Q1FY22 and expects to launch ~30 products in FY22E. We expect 3.4% revenue CAGR in US sales (ex-Natrol) over FY21- FY23E, largely driven by injectable sales. ARV formulations declined 30.3% on a high base. Emerging market and EU revenues grew 13.7% and 19.7% respectively. Potential upside from APIs through PLI scheme is not captured in our estimates and would provide upside to revenue growth estimates.

* EBITDA margin remains stable: Aurobindo reported an EBITDA margin of 21.2%, flat YoY/QoQ. This is despite significant drop in US sales and drop in gross margin led by reduction in S,G&A expenses. We expect EBITDA margin to remain stable around ~21-22%, considering potential increase in R&D expenses in coming years for biosimilars and injectables. The company is looking to file two biosimilars in H2FY22 and potential launch in H2FY23.

* Outlook: We expect the company to register 2.9% revenue and 3.2% PAT CAGRs over FY21-FY23E with EBITDA margin stable ~21-22%. Lower growth is after factoring in Natrol divestment and price erosion in US. Company has been investing for capacity creation of injectables, biosimilars, dermatology, APIs etc. which would help in ensuring long term growth momentum. It announced the acquisition of 51% stake in Cronus Pharma, a veterinary pharma company, for a consideration of Rs4.2bn and management expects revenue of this company to reach of US$100mn in next three years.

* Valuations and risks: We cut EPS by 6-7% to factor in higher price erosion in US. We also cut target P/E(x) to 15x from 18x earlier to factor in weak growth profile. Retain ADD with a revised target price of Rs876/share based on 15xFY23E earnings (earlier: Rs1,130/share). Key downside risks: regulatory hurdles, currency volatility and delay in US launches.

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