Aurobindo Pharma keeps up pace

Product approvals, Natrol drive US growth; European turnaround adds to performance

While pharmaceutical bigwigs such as Sun and Lupin faltered on the bourses after their quarterly results, Aurobindo Pharma gains steadily.

The US growth of peers such as Sun, Lupin, Dr Reddy’s and Cadila has been a concern due to issues with the sector regulator there, leading to volatility in their stock prices. However, Aurobindo has final clearance reports from the Food and Drug Administration (FDA) there for most of its inspected facilities (barring one). It is also receiving regular approvals for product launches in the US, where its sales recorded good growth and the outlook remains strong.

Not surprisingly, its stock was up four per cent after the results on Monday.

The company has been one of the top receivers of FDA approvals for new launches. With 58 approvals in FY16 (28 of these in the March quarter), the company expects the momentum to continue. Another 30-40 are expected in FY17; these include the generics of heartburn drug Nexium, injectible antibiotic Meropenem and kidney drug Renvela.

Also, of the approvals, Aurobindo has launched only 28 and hence there are many pending product launches. The company plans to launch seven in the June quarter, which will help sustain strong growth.

During the March quarter, US formulations' sales at Rs 1,666 crore (44 per cent to overall revenue) grew 24 per cent over a year. The US growth is also being boosted by the recently acquired over-the-counter product range of Natrol.

Added to this is likely turnaround in the European business. Europe sales at Rs 841 crore (about 22 per cent of overall top line) grew nine per cent in the quarter but the acquired Western European business of Actavis is likely to drive this higher. Analysts at Edelweiss feel Natrol continues to clock 15 per cent growth with strong margins and the European FY16 profit after tax was also positive. Hence, Actavis’ integration is running ahead of their earlier expectation.

All this keeps analysts upbeat on Aurobindo. Praful Bohra and Aarti Rao at Religare Institutional Equities say they remain positive on the US business, given the continued momentum in Abbreviated New Drug Approvals (58, year to date) and a large pending pipeline (146). They add that recent clearance to Unit VII and the potential launch of high-value products should support their earnings per share estimate of a 21 per cent compounded annual growth rate over FY16-18.

Analysts at Motilal Oswal say at the current market price, Aurobindo trades at 18.3 times the FY17 and 14.5 the FY18 estimated earnings, a 20 per cent discount to peers. They expect the valuation gap to get narrower, due to the increasing profitability, strong earnings growth trajectory and improving free cash flow.