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Higher R&D spend offsets benefit of better operating leverage

Continues to work towards building a complex product pipeline

* Aurobindo Pharma (ARBP) delivered an operationally in line 4QFY21. The outlook for the Injectables segment continues to improve on the back of better traction in existing products, new introductions, and healthy pipeline build-up comprising complex products. The Vaccine space remains interesting for ARBP in terms of regulatory filings as well as contract manufacturing.

* We have reduced our FY22E/FY23E EPS estimate by 3%/2% to reflect COVIDrelated slowdown in Europe/growth markets and increased R&D spends towards complex products. We continue to value ARBP at 16x 12-months forward earnings to arrive at our TP of INR1,150. We remain positive on the back of: a) ARBP building a diverse and robust complex portfolio over the next 2-4 years, b) enhanced product offerings as well as improving profitability in Europe, c) vaccine prospects, and d) lower financial leverage. Maintain Buy.

Operationally in line with our estimates

* ARBP’s 4QFY21 sales were down ~3% YoY to INR60b (in line).

* US sales declined 5% YoY to INR29b (48% of sales) due to divestiture of the Natrol business. Adjusted for Natrol, US sales grew 5.3% YoY. Europe revenue declined 6% YoY to INR15.5b (26% of sales). Revenue from growth markets declined by 19% YoY to INR3b in 4QFY21 (5% of sales).

* ARV formulation sales grew 29% YoY to INR4.9b (8% of sales). API sales grew 5.1% YoY to IN794m (13% of sales).

* Gross margin expanded 50bp YoY to 60% due to superior product mix. However, EBITDA margin contracted by 60bp to 21.2% (est. 20.7%) due to higher R&D spent (+370bp as a percentage of sales), offset to some extent by lower other expense (-280bp as a percentage of sales).

* EBITDA was down 5% YoY to INR12.7b (in line).

* Adjusting for the forex gain (INR142m), PAT declined 8% YoY to INR7.9b (est. INR7.3b) due to lower margin/higher tax rate in 4QFY21.

* Sales/EBITDA/PAT grew 7%/11%/10% to INR248b/INR54b/INR32b in FY21.

Highlights from the management commentary

* ARBP has 15-20 complex Injectable products under various stages of development. It would be making exhibit batches for four products over the next 3-4 months and expects to file the same by FY22-end.

* Phase II/III study application for UB612 (COVID vaccine) has been submitted to the Indian drug authority (DCGI). It awaits approval for starting clinical trials.

* Contract manufacturing of 25m UB612 doses would start in the near future for Taiwan as well as various other countries.

* ARBP expects to file two Biosimilars products for the European market in 2HFY22. These are Oncology-based Biosimilars. This would be followed up with two more products filings in FY23.

Valuation and view

* We tweak our FY22E/FY23E EPS estimate by -3%/-2%, factoring in: a) impact of the lockdown on offtake of medicines in Europe/growth markets, and b) increased spends towards the development of complex products.

* We expect 11% earnings CAGR over FY21-23E, led by new launches/increased market share in key markets (US/EU), better profitability in Europe, lower financial leverage, and controlled costs.

* We value ARBP at 16x 12-months forward earnings to arrive at our TP of INR1,150. We remain positive on: a) robust ANDA pipeline and ongoing effort towards building niche products in the areas of Injectables, Biologics, Transdermals, and Inhalers, b) wide product portfolio, supported by maximum integration in the manufacturing value chain, and c) improving margin in the EU business. Maintain Buy.

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