Aurobindo Pharma Q3 Results Review: Analysts See Prolonged Price Pressure, U.S. Launch Slowdown As Risks

Most analysts cut their earnings estimates for Aurobindo Pharma Ltd. after the third-quarter earnings, citing a prolonged impact of higher raw material cost, a slowdown in the pace of generics launches in the U.S. and a weak outlook for the ex-injectables business.

They, however, see launches of injectables and biosimilars, investments under the production-linked incentive scheme, besides bottoming of normal products price erosion in the U.S., its largest market, as potential growth drivers for the drugmaker.

Aurobindo Pharma's net profit fell 79% year-on-year, missing estimates, on a high base because of an exceptional gain from sale of a U.S. subsidiary a year earlier. A contraction in the U.S. formulation business, higher input costs and price erosion weighed on the bottom line. Its revenue also fell during the period.

Shares of the company fell as much as 1.5% but pared the losses to trade 0.3% higher as of 10 a.m. on Friday. Of the 32 analysts tracking, 27 recommend a ‘buy’, three suggest a ‘hold’ and two rate a ‘sell, according to Bloomberg data. The average of the 12-month price target implies an upside of 22%.

Here's what brokerages have to say about Aurobindo's Q3 FY22 results...

• Maintains ‘buy’ with a target price of Rs 800 apiece, implying an upside of 17%.

• The company delivered lower-than-expected Q3 FY22 earnings.

• This was led by a margin deterioration due to continued pricing pressure in the U.S. generics, increased raw material and higher logistics costs.

• From the current quarterly run rate of $100-120 million (Rs 750-900 crore) for Eugia business (global injectables), Aurobindo is confident to achieve $650-700 million (Rs 4,800-5,250 crore) by FY24.

• The intensity of price erosion in the U.S. has reduced compared with the previous quarters, said the management.

• Cuts EPS estimates factoring in a prolonged impact of higher raw material prices, a slowdown in pace of launches in the U.S. generics segment, a reduced operating leverage, an increased working capital requirement and a Covid-led delay in increasing sales of injectables in the U.S.

• Aurobindo expects a steady business in Europe for FY23 and expects the growth to pickup by FY24.

• The company has started the work for production-linked incentive scheme with Rs 400-500-crore investment for building 15 kilo tonnes per annum capacities of Penicilin-g at Kakinada. The construction work has started and expects to commercialise production by March 2024.

• The brokerage is positive on Aurobindo backed by a robust complex product pipeline comprising injectables /biosimilars, a comprehensive product offering in the generics space, a healthy free cash flow generation and an attractive valuation.

• Maintains ‘buy’ but cuts target price to Rs 850 apiece from Rs 900, still implying an upside of 30%.

• Ebitda missed estimates due to gross margin compression from higher input costs, price erosion and product mix.

• The ex-injectables business is likely to remain lull in the near term.

• Addition of complex generics and biosimilar will aid medium-term growth.

• Management reiterated top line guidance of $650-700 million (Rs 4,800-5,250 crore) for the injectables business by FY24.

• The outlook for the U.S. oral solids business is likely to remain weak.

• The company is actively working on a new strategy for Europe business.

• The company is evaluating entry into branded business with organic and inorganic means with three-year top line target of Rs 1,000 crore.

• A separate listing or strategic investor in the injectables business will lead to value unlocking for the firm.

• Trimmed estimates to reflect the Q3 miss and a weak outlook for the ex-injectables business.

• The company said raw material prices have peaked and it expects them to stabilise at current level in Q4 and may see some reduction in the future.

• Aurobindo’s unit 5 is undergoing a U.S. FDA inspection.

• The company is in talks with the FDA for resolving warning letters on plants such as unit 1, said the management.

• For the U.S.-based unit, which is under warning letter, the company is planning to shut off the plant, as it generates only $2.5 million (Rs 18 crore) worth of revenue annually.

• Catalysts: injectables business separation, resolution of regulatory issues.

• Downside risks: adverse regulatory outcomes, higher-than-expected price erosion in the U.S.

• Recommends ‘accumulate’ with a target price of Rs 759 apiece, implying an upside of 11%.

• Aurobindo Pharma’s 9M FY22 performance was weak, given cost headwinds and lower U.S. sales.

• Cuts EPS estimates to factor in lower margins and U.S. sales.

• Cost pressures have stabilised and margin trajectory should improve from FY23.

• However, pickup in U.S. sales hinges on timely niche approvals along with stabilisation of pricing pressure in base business.

• The company has multiple growth drivers in place with investments in vaccines, injectables, biosimilars and PLI, which are expected to be reflected from H2 FY23.

• Management indicated that pricing pressures has bottomed out for normal products in the U.S.

• The company guided for scheduled launch of 10-15 injectable products FY23 onwards, which will aid double-digit growth in injectable sales.

• Maintains ‘buy’ with a target price of Rs 868 apiece, implying an upside of 27%.

• Q3 FY22 earnings were weak as U.S. sales trended lower QoQ and raw

  material inflation/higher freight costs affected margins.

• However, working capital reduction helped the company surprise with strong free cash generation of $189 million (Rs 1,400 crore) in Q3 FY22.

• There are multiple levers for the stock.

• The company is contemplating a foray into the Indian branded formulation space and it is open to an acquisition as well.

• A right acquisition can provide another growth platform to Aurobindo.

• A potential spin-off of the injectables entity, which is anticipated in the near term, could also unlock value for shareholders.

• From an earnings growth perspective, the company expects important approvals on the injectables front beginning FY23.

• The company also continues to invest in building on its existing U.S. base through acquisitions.

• Tweaks API growth estimates lower as there has been a delay in investments around fermentation-based API capacities under PLI.