Concerns overdone on Aurobindo Pharma

The Pharma major sheds nearly 10% since the start of the month on regulatory issues

Aurobindo Pharma has shed nearly 10% since the start of the month on regulatory issues both on pricing in the US as well as manufacturing at its Indian facilities. The latest action which has dampened Street sentiment is news that the company's Hyderabad API (Active Pharmaceutical Ingredient) unit has received Form 483 or observations issued after plant inspection by the USFDA. The 3.79% fall to Rs 673 on Tuesday is attributed to this FDA action.

Investors worry that the latest observations could escalate to more serious actions such as Warning Letter or Import Alert impacting revenues as is the case with Aurobindo's peers. So far, the fact that its plants have a USFDA go ahead was perceived to be a big positive. While investors are worried given the 483, the management is unfazed.

Santhanam Subramaniam, CFO says that the company had received one observation some time back, which is procedural in nature and had already responded to the FDA. Analysts too say that the one observation which the company has received is not serious and just procedural in nature and hence concerns are overdone. Sarabjit Kour Nangra at Angel Broking says that APIs can always be sourced externally (from other manufacturers) in the case of issues internally and is thus not a matter of grave concern. Further, while developments on the same will be watched closely, as of now it may be considered as a non-event, say analysts.

The company has also been in the news on drug pricing collusion related investigations. The US Congress is in the process of completing its enquiry and is expected to levy charges against pharma majors soon. This has been an overhang and pulled down stock prices of many Indian pharma companies including that of Aurobindo. Separately, the US Department of Justice last week filed the first charges on generic drug pricing. This is related to an anti-bacterial doxycycline and anti-diabetic glyburide tablets. Aurobindo had been named as it was marketing the generics of glyburide.

However, experts are of the view that it may be an uphill task for the Department of Justice to prove that companies have colluded in taking price hikes and the case may take years to reach any conclusion. Further, Aurobindo has also clarified that sale of the referred product by its subsidiary is not material (around $1.1 million in FY2016 as per IMS). Since the contribution of product is negligible — 0.1% of US sales and less than 0.05% of total sales, no major impact will be felt by the company.

The triggers going ahead are new product approvals and the pace of the launches. What helps Aurobindo is that it does not have dependency on any single product unlike peers and hence best placed against pricing pressures, say analysts. Analysts at Motilal Oswal add that Aurobindo trades at 16 times FY17 and 14 times FY18 earnings estimates, which is at a more than 25% discount to peers. Valuation gap is expected to narrow given the company's improving profitability, earnings growth trajectory (19% annual growth till FY19) and free cash flow. Thus, corrections are a good opportunity to enter the stock for long-term investors.