Aurobindo Pharma makes a decent start to FY18

With 3 key launches in June quarter, analysts have upgraded their earnings estimate

In a sector weighed down by bad news for some time, Aurobindo Pharma has done relatively better. In the past month and a half, the stock has outperformed its larger pharma peers on positive news flow. And, there could be more gains.

The company made a good start to 2017-18, having got approvals for key generic launches in the US. This holds significance, with the pricing pressure on generics in the US, the world's largest health care market.

The company has also seen the completion of a series of successful inspections at many of its facilities here in recent months by the FDA, the American drugs regulator, without any significant adverse comment. The most recent was the inspection of Unit VII; analysts say it got no rap. Unit VII is in a Special Economic Zone and an oral solids manufacturing facility; it is a crucial facility, having received 88 product approvals, 20 tentative ones and 58 filings under review, by the company's presentation. With no major regulatory concerns till now, the company remains on a strong footing to ramp up its US business, compared to many larger peers facing regulatory issues.

There is also pressure in the US generics space, which is there to stay. So, approvals and new launches remain key to driving growth in the US, say analysts.

Recently, the company received approval for the launch of generics of Renvela oral suspension, a kidney treatment drug. Being a complex generic, it is a decent opportunity which many peers have also been eyeing. Complex generics enjoy limited competition and for a longer period, thus contributing to sales and profitability. Aurobindo has been able to beat peers by getting approval ahead of them, which also shows its capability. Analysts at Jefferies say the approval for Renvela address earlier concerns on quality of research and development. The latter's strength should be assessed on complexity of products and quality of filings; Aurobindo, in their view, has made one of the better quality filings, as reflected in the ability to receive approval in a shorter time frame. Aurobindo had been a late filer as compared with Lupin or Cipla.

Aurobindo has also launched two more key generic products -- anti-bacterial injectables of Meropenem and of attention-deficit/hyperactivity disorder drug Strattera. The launch of the three products (including Renvela) has led to a five per cent FY18 earnings upgrade by analysts at Jefferies. They feel if the company can get approval for Renvela tablet generics by the December quarter, it can mean another three per cent earnings upgrade.

Overall, the company has a strong product pipeline, with 115 pending review for launch and 28 under tentative approval. More, it faces lesser product concentration risk among peers, with no single product contributing more than three per cent to sales. This also reduces risks from increased competitive intensity, say analysts.

The US contributes a little more than three-fourth to sales; Europe gets about a fifth of the revenue. The company had acquired part of Actavis' portfolio to drive its European business and, to enhance profitability, has already transferred the manufacturing of 69 products from Europe to India, where costs are lower. Additionally, the acquisition of Generis Farmaceutica catapults the company to a leading position by value and volume in the Portuguese generic market. These should support the company's initiatives of expanding into new places, such as Poland and the Czech Republic. In sum, prospects in Europe are also improving.

Sarabjit Nangra at Angel Broking says Aurobindo retains a 'Buy' recommendation in the pharma space, looking at the stock's reasonable valuation. Analysts at Jefferies say that despite the recent rise in the stock price, it is trading at a 20 per cent discount to peers, even as there is much better visibility and growth in earnings. Jefferies has increased its price target for Aurobindo to Rs 780 after the March quarter results; HDFC Securities has Rs 740 and Motilal Oswal's was Rs 750.