Price Erosion In U.S. Portfolio To Continue, Says Aurobindo Pharma

The price of Aurobindo Pharma Ltd.’s drug portfolio in the U.S. may continue to erode, and the company management expects the single digit quarter-on-quarter price erosion to continue in the near term.

Shares of Aurobindo Pharma fell over 3 percent in the afternoon trade on Friday, after the drug maker’s October-December quarter earnings failed to meet street expectations.

The Telangana-based drugmaker Aurobindo Pharma Ltd. reported a 6.3 percent year-on-year growth in profit for the third quarter, but missed street estimates.The profit after tax increased to Rs 578.6 crore in the quarter from Rs 544.3 crore in the corresponding period last year, according to an exchange filing.

The company has also announced its foray into biosimilars, with the acquisition of four products from TL Biopharmaceutical AG. A biosimilar is a biopharmaceutical drug designed to have active properties similar to one that has previously been licensed.

As part of the agreement, TL will supply all the developmental data for four molecules and Aurobindo Pharma will develop, commercialize and market these products globally. Although the company has not disclosed the upfront and royalty payments for the deal, “but can say are not huge,” Aurobindo management said in a post-earnings conference call.

The biosimilars portfolio will be mainly targeted to regulated markets in the start and Aurobindo Pharma expects the first filing in 2020. The company may consider outlicensing the drugs in certain emerging markets post Phase-1 clinical trials to fund R&D (research and development) expenses.

Pricing Pressures In U.S.

The company’s sales in the U.S. grew 12 percent on a year-on-year basis, the slowest in at least six quarters as price erosion continued with customer consolidation and competitive pressures.

The pricing pressure was partly offset by new product launches in both oral and injectable segments and volume increase. In the near-term, the management expects the single digit quarter-on-quarter price erosion to continue.

Aurobindo Pharma’s portfolio saw a price erosion of 7 percent on a sequential basis (one-off item of rebate and charge-backs had an impact of 4 percent) and 13 percent compared to the corresponding quarter last year. U.S. contributed 56 percent to the company’s total revenue in the third quarter.

The U.S. injectables business maintained its growth momentum. The management re-iterated their guidance of 50 percent growth for the next “several years”.

The management said the performance of Natrol, the nutritional supplement maker that Aurobindo Pharma acquired in 2014, was in line with expectation even as the work continues on enhancing its product pipeline. The management indicated the possibility of 15 percent growth in the short to medium term for Natrol, with the existing portfolio driving momentum till new products start kicking in.

Acquisitions To Cap Net Debt Reduction

The company’s net debt reduced to $410 million in the quarter ended December as against $484 million in the September quarter. This reduction was aided mainly by improvement in the working capital and cash flow generation in the quarter. However, the management has guided debt level of $600 million for the financial year 2016-17 end, as compared to $640 million at the start of FY17 on account of its recent acquisitions.

Its biosimilar foray would also lead to higher R&D costs. The clinical trials’ cost has been estimated by the management at $80 million spread over three to four years. From the current 3.5 percent to sales, R&D costs are expected to go up to 5-6 percent of sales over the next three years.

Aurobindo Pharma had inked a pact in January to acquire Portugal's Generis from Magnum Capital Partners for a consideration of €135 million (around Rs 969 crore).

Analyst View

Brokerage firm Sharekhan maintained its ‘Buy’ rating on the stock, and left the price target unchanged at Rs 825 on account of the strong U.S. product pipeline.

“The numbers have been on the weaker side due to pricing pressures which is also likely to be there going forward. But a good pipeline in the U.S. business should be able to help mitigate some pressure,” said Purvi Shah, research analyst at Sharekhan in a telephonic interview.