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* Aurobindo Pharma (ARBP) has entered into an exclusive license agreement with BioFactura to commercialize a proposed biosimilar of Stelara (Ustekinumab). ? With this agreement, ARBP has fast-tracked its pipeline for biosimilar offerings.

* The company is on track to build key levers of growth – a) accelerating the biosimilar pipeline, b) enhancing the ANDA pipeline comprising complex products, c) leveraging the PLI scheme, and d) expanding its China operations.

 We value ARBP at 12x 12M forward earnings to arrive at a TP of INR710. While the earnings outlook is robust at a 16.5% CAGR over FY23-25, we maintain our Neutral stance on the stock.

Agreement aids global commercial rights for b-Stelara

* Under the terms of the agreement, ARBP has been granted exclusive license rights to commercialize BFI-751 (b-Stelara, Ustekinumab) in all major regulated markets, including the US, EU, UK, Canada, Australia/New Zealand and certain other semi-regulated markets and emerging markets worldwide.

* The market size of Stelara is USD9.7b (CY22). Biofactura would receive a license fee of up to USD33.5m spread across milestones till commercialization in regulated markets. ARBP would have 57-60% of profits based upon markets.

* BioFactura would begin phase III clinical trials soon. ARBP intends to file bStelara in India/EM in CY24. The regulated market filing would be in CY26.

* Ustekinumab works by blocking both IL-12/IL-23 and is used for treating Crohn's disease, ulcerative colitis, plaque psoriasis and psoriatic arthritis.

Decent potential for ARBP despite late entry

* Considering the potential of Stelara in terms of market size/multiple indication use, companies are implementing multiple strategies to reduce the time for commercial benefits. As shown in Exhibit 3, apart from BioFactura, Amgen/ Alvotech have settled with Innovator for launch in CY25. Celltrion has already filed, while Formycon/Meiji Seka pharma would be filing in CY23.

* Developers like Alvotech/Formycon/Meiji Seka Pharma have tied up with companies having commercial reach like Teva/Fresenius /Intas to enhance the presence across the value chain.

* ARBP has reduced the timeline for development through a tie-up with BioFactura. The market formation for b-Stelara is expected to start in CY25 and thus Bio-factura-ARBP would be a late entrant in this market. Having said this, even after assuming 95% price erosion/10% market share, the annual sales potential for BioFactura-ARBP would be USD50m from this opportunity.

Valuation and view

* The outlook for ARBP is promising, considering 1) business opportunities due to regulatory issues at peers, b) niche launches (g-Revlimid), c) commercial benefits of Pen-G, and d) biosimilar pipeline.

* We expect a 16.5% earnings CAGR, led by an 11% sales CAGR in the US and a 240bp margin expansion. However, the current valuation adequately factors in earnings upside. Maintain Neutral on the stock.

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