Growth in key markets perks up Aurobindo stock, earnings to increase

Shares of Aurobindo Pharma have been gaining on the bourses, and are up over 9 per cent since the June quarter results, announced a few days ago. This took the total gains to about 25 per cent since the June lows of Rs 526. 

Easing concerns over pricing pressure in the US, and Food and Drug Administration (FDA) inspections at Aurobindo’s manufacturing units are behind the upbeat sentiment. 

Continued traction in the US and boost from European markets continue to drive performance. US formulations sales growth of about 12 per cent and European formulations sales rise of 31 per cent, year on year, in the June quarter hold testimony. Analysts are bullish on the company given that the US and European formulations contribute about 45 per cent and 28 per cent, respectively, to the overall sales, and their prospects are also looking good. 

Analysts at Jefferies say Aurobindo's better filings and cost leadership position will help it overcome the pricing challenge. The stock is their preferred pick in large-cap space. Aurobindo's US sales are to be led by planned launches of 30-40 products, including oral-dosages, controlled substance, and injectables. A few interesting opportunities such as generic launches of Toprol XL (anti-hypertensive drug), heartburn treatment drugs such as Prilosec and Prevacid in near term also add to the sales figures. The injectables sales ($154 million in 2017-18) is expected to grow by 30 per cent year on year in the current fiscal year. The recently approved anti-bacterial injectable Ertapenem generics is seen as a $45-50 million revenue opportunity in 2018-19. A ramp-up in OTC (over-the-counter) should help the segment grow to $60 million (from $22 million in 2017-18), while the acquired Natrol business, clocking a strong double-digit (12-14 per cent) growth, adds to the company's confidence. 

The traction in European revenues remains strong, supported by an earlier acquisition. Despite the growing base, the recently announced acquisition of businesses of Apotex in five European countries may start contributing to growth over time, says Ranvir Singh at Systematix Stock Broking.

On the flip side, Aurobindo may have seen some pressure on margins led by one-offs as product recall/provisions and some impact on higher raw-material prices. While analysts see margins improving over coming quarters, they remain watchful on Aurobindo's net debt, which rose by $31 million owing to rising inventory levels in Q1. It can increase further following acquisition of Apotex, but Aurobindo says it remains committed on net debt reduction in FY19.