Aurobindo Pharma: Crisis of confidence

May meet revenue guidance for FY13 if issues with USFDA are settled

For the past year, investors of Aurobindo Pharmaceuticals had been almost snowed under with negative surprises. While the stock price had been hammered down 40 per cent over the past year, the company failed to inspire confidence, claim analysts. The crisis started last February when the company came under the scrutiny of the the US Food and Drugs Administration (FDA), which resulted in an import alert against the company’s unit-III.

It ran into further trouble with the recall of anti-depressant citalopram tablets in the US due to wrong labeling in August 2011. The company’s unit-IV, too, is facing an import ban and this had caused a revenue loss of $36 million. Both these developments have affected fresh approvals in FY12, resulting in relatively weak numbers. There were merely a dozen launches in the US on account of the FDA issues.

A combination of these factors had an impact on Aurobindo’s performance through FY12, especially in Q4. Its Q4 revenues grew merely three per cent year-on-year to Rs 1,191 crore against analysts’ estimates of Rs 1,250 crore. Apart from the issues faced due to FDA’s scrutiny, the company also undertook some quality control measures at one of its high margin plants (unit-XII and unit-II) and lower licensing income, claim analysts. Following the issue of wrong labeling, dossier income (contract manufacturing) also fell substantially. The operating profit margin fell sharply by 710 points to 12 per cent, against market expectations of 15 per cent. Net profit, too, fell 14 per cent to Rs 108 crore.

In FY13, the company has got some clearances for unit-III and more clearances are likely to come for unit-IV as well. According to analysts at ICICI Securities, “With the clearance for unit-III and the possible positive outcome for unit-VI, the company is expecting at least 20 launches in the US. It has already launched high potential Combivir in the US.”

Though Aurobindo has guided for a 15-20 per cent growth in its FY13 revenues, it’s critical for it to get a green signal from the USFDA for unit-IV. Emkay Global believes with the resolution of issues at unit-III, FY13 could see 11 launches. Over the next couple of years, margins, too, could return to 15 per cent, believe analysts. However, the company is prone to springing negative surprises on investors, a big downside risk. This apart, since most of its debt is denominated in foreign currency, a weak rupee will continue to hurt.