Aurobindo Pharma: Regaining traction

Strong US niche product pipeline, turnaround in Europe, focus on ARV biz to drive margins & growth

Aurobindo Pharma, after correcting about 20 per cent from Rs 1,264 in February, has pared a large part of the loss, closing at Rs 1,221 on Tuesday. The correction was due to some disappointment on the margin front in the December 2014 quarter, US Food and Drugs Administration (FDA) inspections at its manufacturing units and also the proposed QIB worth $350 million that would have led to some equity dilution, say analysts.

Aurobindo has a strong niche product portfolio in the US market, comprising injectables, oral contraceptives, peptides and ophthalmic products.

Analysts at HSBC, in their February note, had said that in the near-term controlled-substances (under AuroLife), high value oral solids, triple combination HIV products and nutraceuticals will drive the company's US business. The filing rate is aggressive (78 ANDAs filed in FY14), which has led to the company having the largest number of pending ANDAs (181) in the US.

While new product approvals in the US are margin drivers, Aurobindo is now also selectively bidding for better-margin in tenders of anti-retroviral drugs (HIV treatment).

According to IMS data, Aurobindo’s trailing three months (T3M) US sales in January'15 marked a growth of three per cent over T3M sales in December 2014. This was the third highest growth after Dr Reddy’s four per cent and Cadila’s eight per cent growth. Analysts at Nomura say that T3M sales of anti-hypertensive Diovan generic increased 55 per cent.

Europe is also likely to become a growth driver post acquisition of Dublin-based Actavis Plc’s commercial operations in Europe.

Analysts at Citi say Aurobindo has rationalised the product basket, integrated front ends and gained volumes in its own portfolio. Annual earnings before interest, tax, depreciation and amoritisation losses are set to come down from €20 million (when acquired) to €10 million in FY15, and likely to break-even in FY16. Aurobindo is setting up a plant in Vizag to cater to Europe. Supplies should start in FY17 and drive margins to peak levels of 14-15 per cent.

Analysts at HSBC had said the Ebitda margin in first half of FY15 was 22 per cent, well ahead of the average of 18 per cent for FY09-13; which they feel is sustainable and expect return on invested capital (ROIC) to improve to 23.7 per cent by FY17 from 20 per cent in FY15. An improvement in free cash flow should also help to reduce leverage. The QIB, if approved, will further reduce net debt/equity to sub-0.5x levels, believe analysts at HSBC. While analysts as Ranjit Kapadia at Centrum Broking have target price of Rs 1,380, HSBC's have a target price of Rs 1,586 and those most bullish as Citi have target price of Rs 1,945.