Aurobindo Pharma stock: Good growth in Europe may cushion downside

Aurobindo Pharma continues to be under pressure on the bourses owing to the US Food and Drug Administration’s (US FDA’s) observations to its unit-IV facility at Hyderabad.
 
On Monday, Aurobindo confirmed that the unit has received nine observations between February 12 and February 20. As a result, some caution will prevail till complete clearance is given to the unit, even as analysts say the observations are not very serious.
 
The firm’s unit-IV makes injectables and accounts for a third of Aurobindo’s pending abbreviated new drug applications (ANDAs), analysts said. An ANDA contains data, which is submitted to the FDA for review and approval of a generic drug. After approval, companies can sell the generics in the US market.
 
Injectables, which contribute a fifth to US sales, are a key earnings driver. The US accounts for 44 per cent of Aurobindo’s sales. Injectables witness limited competition, and hence enjoy higher profit margins of over 20 per cent compared with 12-15 per cent for oral solids.
 
Ranvir Singh at Systematix Shares said of the addressable market of $87.2 billion highlighted by Aurobindo in its Q3 FY18 presentation, a third would be from niche products such as injectables. So, any disruption in supplies from unit-IV can have a bearing on Aurobindo’s prospects.
 
A positive is that analysts do not consider the observations as serious. Kotak Institutional Equities said the observations could be viewed as ‘low to moderate’ in criticality and could be addressed by Aurobindo without major remediation.

Source: BS Research Bureau

An escalation, although unlikely, will depend on the management’s remediation plan, they added.
 
Surajit Pal at Prabhudas Lilladher said Aurobindo was required to rework monitoring of implementation process of the established procedure and inform/ensure the FDA about the corrective actions. Pal expects Aurobindo to achieve resolutions on these observations in FY19 and said any new approval of ANDAs was unlikely to be blocked till the resolution was achieved.
 
Another positive is that Aurobindo is a diversified player with over a fourth of revenues earned from Europe. The geography grew 37 per cent in the December quarter compared with 9.4 per cent growth in the US. The company is also working on enhancing profitability of its European business by shifting a significant share of manufacturing to India.
 
Analysts said given the strong European prospects and as most concerns relating to unit-IV are priced in, downside was limited for the stock.
 
At Rs 589, Aurobindo is trading at 12 times its FY19 estimated earnings versus Sun Pharma, which despite much higher concerns trades at 23.5 times.