Strong product pipeline, valuations keep street positive on Aurobindo

The company delivered a muted show in the September quarter

The Aurobindo Pharma stock gained 3.5 per cent in trade on Wednesday despite a muted performance in the September quarter. Most analysts shrugged off the miss on operating performance and instead focused on the recovery in the US business in Q2 and the revenue visibility in that market.

Overall, the revenue was down 2 per cent, while the operating profit margin slipped 210 basis points over the year-ago quarter.

What pegged back the sales in the September quarter was the performance of the antiretroviral (ARV) segment, which reported a 71 per cent YoY decline in the revenue on a higher base. Higher stocking in previous quarters and efforts to liquidate the same led to pressure on prices.

The active pharmaceutical ingredient (API) business, too, registered a below-par number, falling 6 per cent YoY. Within geographies, the rest of the world markets reported a fall of 13.5 per cent. The ARV, API and RoW businesses together accounted for 22 per cent of consolidated sales.

While reported numbers for its biggest market, the US, pointed to a decline of 7 per cent, adjusted for the divested Natrol business, the same saw growth of 6.9 per cent. Despite single-digit price erosion and higher channel inventory, volume growth across the oral solids segment helped post the gains.

The injectables business was flat YoY, though the 10 per cent sequential uptick indicates that there is gradual recovery led by hospitals. The pricing pressure in the US market, according to the management, is likely to stay in the near term before stabilising over the next couple of quarters. 

Analysts at Edelweiss Research, however, say that the near-term pressure from ertapenem (antibiotic) competition and high-single-digit price erosion are likely to be offset by a pipeline of 170 pending abbreviated new drug applications, 50 annual launches, and settlement for myeloma treatment drug Revlimid.

While the global injectable sales stood at $105 million in the quarter, the company has reiterated its earlier guidance of hitting the $650-$700 million mark by FY24. Growth for this business is expected to come from fresh launches, the addition of oncology and penems (antibiotics), and increase in market share of the existing portfolio.

Though a majority of brokerages have a positive view on the stock, analysts at Kotak Institutional Equities have cut their earnings estimates by 12 per cent each over the FY22-24 period on weak Q2 results and downward revision of estimates for the US market.

“Given the high US base, we already had our concerns on US growth; the management’s caution for Q3 on account of continuing pricing pressure, slow progress across complex segments, and on-going USFDA inspection at Aurolife drive our lower target multiple,” they say.

While growth prospects for the company given the product portfolio, and ongoing investment across segments (injectables, biosimilars) over the long term are strong, the Street will keep an eye on near-term pricing pressures. Given the multiple triggers, most analysts believe the risk-reward in the stock, which is trading at an undemanding 11 times its FY23 earnings estimates, is favourable.