Aurobindo Pharma Q1 Review: Analysts Cautious On U.S. Generics, Antiretroviral Sales Slowdown
Analysts remained cautious on Aurobindo Pharma Ltd. on account of a slowdown in the U.S. generics, delay in launches amid a third wave in the key American market and lower sales of antiretrovirals.
The drugmaker saw its net profit fall sequentially, missing estimates, in the quarter ended June. That came as its U.S. revenue contracted and sales of Covid-related treatments declined in India. The company’s revenue and operating income, too, declined over the preceding three months, while margin remained stable.
Aurobindo Pharma has acquired a 51% stake in Cronus Pharma Specialties India Pvt., a Hyderabad-based generic veterinary pharmaceutical products developer and contract research organisation service provider, for Rs 420 crore.
The company, in a post-earnings conference call, said the acquisition involves payment towards both the India-based entity and its 100% U.S. subsidiary Cronus LLC. The India unit and U.S. arm cumulatively achieved more than about Rs 9,654 crore ($13 million) turnover last year and about Rs 4,827 crore ($6.5 million) in the first half of the current year.
Cronus is an SEZ unit on a 10-acre land in Hyderabad catering to oral and injectable business segments and has an R&D centre, Aurobindo said on the call. It has 67 products — 40 injectables and 27 oral.
The capital infusion will go towards reduction of high cost debt and for paying the filing fees towards product approvals and more R&D, Santhanam Subramanian, chief financial officer at Aurobindo Pharma said. The 51% stake will give Aurobindo control, but “personally, not Aurobindo’s views, it can be another big company like Natrol, four-five years down the line”, Subramanian said.
Shares of Aurobindo were trading 2.36% lower as of 2:26 p.m. on Monday compared with a 0.21% gain in the Nifty 50.
Here's what brokerages have to say about Aurobindo's Q1 FY22 results...
Recommends ‘hold’ rating with a target price of Rs 865 apiece, implying an upside of 12%.
Changed rating from ‘buy’ due to the challenging business environment in the near to medium term, especially in the U.S.
Operational performance below estimates amid a decline across the U.S. market and antiretrovirals.
Aurobindo possesses one of the best enduring generics ecosystem among peers (vertically integrated model, lower product concentration) to withstand the volatility in the U.S. generics space.
Plans to venture into complex areas like biosimilars, vaccines and complex injectables.
PLI scheme participation will enhance its backward integration in antibiotics, open new revenue streams.
The company has also significantly improved its net debt position from foregoing the Sandoz deal and from the sale of its Natrol business.
Few plants under the U.S. FDA scrutiny.
However, clearance of a critical plant (Unit IV) indicative of company's work towards stricter adherence.
U.S. generics scenario not encouraging at the current juncture due to persistent base business price erosion and slower injectables ramp-up.
The management stated that the company purchased nine OTC products and six ANDAs as the opportunities were cost beneficial and for portfolio expansion.
By April, 2023, the management expects the entire product line of its acquired Cronus Pharma to be operationalised.
Management expects Cronus’ six outsourced products, generating $13 million to generate $20 million.
The company launched five products in U.S. during the quarter. Aurobindo plans to do 30+ launches in FY22.
Plans to file two products before March, 2022 in the U.S.; one product next month in the U.K. and Europe.
Recommends ‘buy’ rating with a target price of Rs 900 per share, implying an upside of 18%.
Reduced estimate to factor in higher competition in U.S. generics and lower other income to account for the usage of capital for acquisitions and lesser antiretroviral sales.
The company has received Form 483, with seven procedural observations, post the recently concluded U.S. FDA inspection at Unit 1.
There was a high single-digit price erosion in the U.S. due to higher inventories in the channel and subsequent dumping.
The company is working to enhance product offerings comprising oncology, hormones, depot injections, inhalers, biosimilars, topicals, and Patches.
Timely approval remains critical for a better growth outlook over the next two-three years.
Efforts are underway to improve margin in the Europe business.
Expects 8% earnings CAGR over FY21-23E, led by launches in key markets (U.S./EU) and from the acquired veterinary business, better profitability in Europe, lower financial leverage, and controlled costs.
Recommends ‘buy’ rating with a target price of Rs 935 per share implying an upside of 22.8%.
The change in product mix impacted gross margin negatively (down 150 bps QoQ).
But decline in opex kept Ebitda margin in line with the previous quarter.
Uncertainty regarding recent acquisitions could remain as an overhang in the near term.
The risks are adequately reflected in the current price and further downside from current levels is limited.
Acquired a portfolio of nine marketed OTC products and six ANDAs and Cronus Pharma.
Management reaffirmed its global injectable business revenue guidance of about Rs 4,800-5,200 crore ($650-700 million) over the next two-three years.
Also reaffirmed its commitment to reach 60% gross margin.
Catalysts: Injectables business separation, resolution of regulatory issues.
Downside risks: Adverse regulatory outcome, higher-than-expected price erosion in the U.S.
Recommends ‘hold’ with a target price of Rs 795 apiece, implying an upside of 3.3% from Aug. 16 opening.
Downgrades rating to ‘hold’ from ‘buy’ due to: 1) Cut in sales estimates by 13%/9% in FY22E/FY23E on account of lower sales in U.S. and antiretroviral, besides rationalisation of growth in EU; 2) Reduction in Ebitda margin by 200 bps each in FY22E and FY23E on unfavorable product mix; 3) sudden disclosure of brands/ANDA acquisitions (during Q1 earnings) in the U.S. and surprising unrelated acquisition of veterinary company/products.
Injectable sales remained under pressure due to lower footfalls in the U.S. hospitals.
Expects injectable sales to decrease further in Q2 as activity would remain subdued due to third wave of Covid-19 hitting the U.S. operations.
The Eugia business of oncology/hormone injectables had sales of about Rs 208 crore ($28 million) in Q1FY22, in line with management guidance.
Expects recovery in Eugia’s sales would remain slow, as launch of many injectables could get delayed due to third wave in the U.S.
EU and API remain tepid due to global supply constraints.
Surprise acquisition of OTC brands/ANDAs has resulted in negative free cash flow and turned the company as net debt from net cash.
On biosimilar, company’s first two products will get filed during FY22 and its third product will be filed during FY23 and after that every year one-two products will get added to the existing portfolio.
The management expects R&D to increase on the back of ongoing clinical trial and company is also continuously working towards its cost optimisation.
Recommends ‘buy’ rating with a target price of Rs 981 apiece, implying an upside of 29%.
Compliance situation at Aurobindo is a matter of concern considering their large dependence on the U.S. market.
With respect to pricing/volume pressures, brokerage thinks that the situation is temporary.
Brokerage views Cronus Pharma as an interesting acquisition and valuation as reasonable,
This is considering the large pool of filings and a developmental pipeline that the company is able to get a head start with and the growing strategic importance of animal health business.
Lowering estimates on Aurobindo to factor in the slowdown in the U.S. generics and also their antiretroviral business.
Aurobindo is closer to completion of vital clinical trials on its first set of biosimilar assets.
On the PLI front, they have requested certain clarifications from the government, post which the financial outlay should begin.
Recommends ‘buy’ rating, but cuts target price to Rs 970 from Rs 1,030, still implying an upside of 26% from Aug. 16 opening.
Barring near-term pressure, the U.S. pipeline looks solid.
Biosimilar filings would aid growth post-FY23.
gRevlimid (a blood cancer pill) adds FY23–25 revenue stability.
250+ EU pipeline can drive steady 9–10% growth.
While animal health entry is a surprise, Aurobindo has successfully integrated acquisitions such as Natrol and low capital outlay limit risk.
Have not factored in the vaccine (Covid and pneumococcal) opportunity yet that could provide further upside to FY23/24 numbers.
Business is steady and with low-profit concentration, it is unlikely to throw any major earnings surprise.