Near term upsides for Aurobindo Pharma stock capped on weak US outlook

The company has been making small acquisitions to bridge the growth gap

The Aurobindo Pharma stock was down 8 per cent in trade and the biggest loser among the BSE 100 companies after it posted weaker than expected June (Q1FY22) quarter results. The stock has been underperforming its peers over the past year given the flattish trend of revenues on the back of pricing pressures in the US market and the lack of immediate triggers. While the company has invested significantly in developing a differentiated product pipeline, the gains from new drugs will be back ended. Moreover, heavy investments in facilities could impact its cash flows in the near term. 

As was the case in the March quarter, results in the June quarter too missed street estimates. The company reported a 4 per cent decline in revenues y-o-y, on a sequential basis the fall was 5 per cent to Rs 5,700 crore. Brokerages had pegged sales at over Rs 6,200 crore. Lower formulation sales and the divestment of Natrol business led to the y-o-y decline; adjusted for Natrol, sales were up 3 per cent y-o-y. 

While Europe, rest of the world and active pharmaceutical ingredient sales increased, the decline was largely due to the weak US formulations and antiretroviral sales. The latter, which accounts for 5 per cent of turnover, was down a steep 30 per cent on a high base. 

Sales in the US market which accounts for 47 per cent of overall revenues was down over 6 per cent on a sequential basis (1.5 per cent down y-o-y). The company indicated that the price erosion was in higher single digits which is more than normal. The erosion was due to a build up of inventory across the supply chain amidst weak demand. The company hopes to offset the negative impact of this by new launches and higher volumes. While the company launched five products in the quarter, it intends to introduce over 30 products on an annual basis. 

To strengthen its portfolio, the company purchased nine over-the-counter products and six abbreviated new drug applications. The portfolio has been purchased at over $100 million; the company expects to generate $30-35 million in the first year from the brands/ANDAs which are complementary to its current basket of products. Aurobindo also acquired an animal health company Cronus Pharma Specialties for Rs 420 crore. The 51 per cent stake in the Cronus will give Aurobindo access to 67 products of Cronus of which 22 have been filed with the US drug regulator. Given that Cronus had a turnover of Rs 11 crore, overall valuations at 72 times FY21 sales, according to Yash Gupta of Angel Broking, is on the higher side.   

While the pricing pressures are expected to continue, the street will keep an eye out for the plan to restructure the injectables business into a separate unit. The company has guided for increasing its generic injectables business from $395 million in FY21 to over $700 million over the next three years. The injectables business had revenues of $102 million in the quarter.

Progress on regulatory compliance will be another area which will impact the stock. The company’s Unit 1 facility was audited recently and a 483 was issued with seven procedural observations. While the company indicated that it is responding to this, the pace of reinspection and clearance for all facilities will be a major trigger for the stock. 

While the company’s integrated business model, focus on differentiated products such as complex injectables, biosimilars and vaccines are positive, Siddhant Khandekar and Mitesh Shah of ICICI Securities have changed their rating from buy to hold given the challenging business environment in the near to medium term especially in the US. Investors should await an improvement in the revenue run rate as well as margin trajectory, before considering the stock.