Aurobindo Pharma Shares Gain On Cronus Deal Termination
Shares of Aurobindo Pharma Ltd. rebounded from their 52-week low after the drugmaker terminated a deal to acquire a majority stake in a generic veterinary pharmaceutical products developer.
The Mumbai-based company on Aug. 12 had entered into a binding agreement to buy a 51% stake in Cronus Pharma Specialities India Pvt. for Rs 420 crore. Its board, late on Friday, however, “approved the termination of the aforesaid agreements and the parties have mutually agreed and terminated the said agreements”, according to an exchange filing.
Aurobindo Pharma had earlier said Cronus’ acquisition would provide it a foothold in the $48-billion (Rs 3.56 lakh crore) global animal health market. “Cronus is in the business of veterinary pharmaceutical formulation business catering to export markets and complements the company’s product offerings in the regulated markets,” Aurobindo had said in the Aug. 12 filing. Cronus’ FY21 turnover was at Rs 11.6 crore.
Aurobindo Pharma’s stock has declined around 18% after by the deal announcement, disappointing first-quarter results and seven observations by the U.S. Food and Drug Administration on inspection of its API manufacturing unit in Medak, Telangana. The stock had lost around Rs 8,700 crore in market capitalisation since Aug. 12.
“The acquisition raised concern over capital allocation even though management stated it does not fall within the purview of a related-party transaction,” CLSA said in a report. “While the cancellation may allay concerns over capital allocation, its earnings outlook remains benign in the medium term as the company is going through a large investment phase.” The research firm retained its ‘outperform’ rating on the drugmaker with a price target of Rs 830, implying a potential upside of 22%.
On FDA observations, Prabhudas Lilladher said while there were no issues of data integrity and repeat observations, the seven observations raised concerns over quality of data maintained at the plant, as Aurobindo Pharma documented the outcome of tests after a lag. “Other observations dealt with several discrepancies over ensuring quality of tests, sound scientific rationale and overlooking manufacturing practices as prescribed by U.S. FDA.” The brokerage maintained its ‘hold’ rating with a target price at Rs 795.
Shares of Aurobindo Pharma rose as much as 6.6% in early trade on Monday but soon pared gains to trade 2.6% higher at Rs 699 apiece as of 12:20 p.m. The stock had closed at its 52-week low of Rs 677 on Friday. The scrip is on its way to post its worst month since November 2011. It lost 25% so far this year, and underperformed the BSE Healthcare Index.
Of the 31 analysts tracking the company, 25 have a ‘buy’ rating, and three each suggest a ‘hold’ and a ‘sell’, according to Bloomberg data. The average of 12-month consensus price targets implies an upside of 36.2%.