US regulator's inspections at Aurobindo spook investors

No major negative observations by watchdog, but Street edgy as more inspections lie ahead

From its all-time high of Rs 895 seen six months ago, the Aurobindo Pharma stock has recently fallen to 14-month lows. 

Strong US growth and healthy rise in US approvals for products fuelled the rally last year. But the US Food and Drug Administration (FDA)’s inspections at the company’s plants afterwards unnerved the Street. This is not surprising, given the already weak sentiment towards Indian pharma which faces regulatory problems in the US. 

For Aurobindo, the latest development is the US issuing six observations after inspecting the company’s Unit-III mid-April. Despite company statement that the observations were procedural, the Street remains edgy as more US inspections lie ahead. 

Sarabjit Nangra at Angel Broking, however, says there is nothing major to worry about, that such sharp moves in stock price result from weak sentiment towards pharma stocks. 

While the jury is out on US FDA inspections, many fundamental triggers seem to go in the company’s favour. 

Amid competition concerns on US base business, there sits a large pipeline of products. Also, the company continues to get ahead of peers in US approvals for launches. During March quarter, it got 13 approvals. Peers Sun Pharmaceutical, Lupin, Cipla, Dr Reddy’s, Cadila Pharmaceuticals, and Glenmark got one to six approvals each, says Elara Capital. 

In the first nine months of FY17, Aurobindo received 47 approvals, which should provide some comfort to investors. 

 

Analysts at Motilal Oswal Securities see Aurobindo’s sales growing nine per cent in March quarter from a year ago in the US, from where it derives over half of its revenues. 

Further, the company runs the least risk of product concentration among peers, with no single product accounting for more than three per cent of sales. 

As for peer Lupin, which faces competition in diabetes portfolio, only two products have been key contributors in the recent past. In six to nine months, Aurobindo is starting up three key plants, analysts at Motilal Oswal Securities point out. 

According to Nangra, confidence will return once companies start reporting their March quarter performances.