USFDA nod to Unit IV a breather for Aurobindo Pharma; share price up 20.4%

Analysts remain positive on Aurobindo's future prospects including the US despite the higher base

Aurobindo Pharma got a huge relief with its Unit IV, an injectables plant located in Hyderabad, receiving an establishment inspection report (EIR) from the US Food and Drug Administration (FDA). Investors, too, celebrated, with the company’s share price surging 20.4 per cent on Wednesday, leading to an increase of Rs 5,980 crore in its market value to Rs 35,288 crore on the BSE.

An EIR with voluntary action indicated status means the FDA is not likely to take any action, which could otherwise have hampered drug supplies to the US from this facility. The Street was surprised as analysts were factoring in a much adverse USFDA action on Unit IV.

The facility remains important as it contributes more than 10 per cent to Aurobindo’s overall sales and about 20 per cent of the US sales (a majority of injectables supplied to the US market). Further, there were about 46 pending new drug applications (about 30 per cent of 154 pending; see chart) and 50-60 per cent of pending injectable filings from this facility.

Since injectables are complex-to-manufacture limited-competition products, the company also garners higher margins. Hence, any negative regulatory outcome would have impacted the company’s earnings by about a fifth and also delayed new product approvals and future growth.

Analysts at ICICI Securities now expect the company’s US injectables segment to grow 22 per cent annually over 2018-19 and 2021-22, driving overall revenue by 17.1 per cent annually during the period.

The company has been reporting strong growth in key geographies. The US, which is about half of Aurobindo’s sales, had grown by 22 per cent year-on-year (YoY) in the December quarter (23.5 per cent in constant currency terms), driven by injectables, orals, and other drugs. The injectables business reported robust growth of 24 per cent to $76 million, contributing about a fifth to US revenue.

European revenue, contributing a fourth to overall sales, grew 14.2 per cent YoY (19 per cent in euro terms) in the December quarter.

Analysts remain positive on Aurobindo’s future prospects, including the US, despite a higher base. Low product concentration (less dependence on a particular product) also provides comfort on the company, which continues to grow on the back of a strong pipeline and the launch of new drugs.

The acquisition of Sandoz’s portfolio in the US will further diversify Aurobindo’s dermatology segment. The acquisition though has been slightly delayed and is now expected to close by the end of 2019-20 (FY20). It is looked as a major trigger for Aurobindo and is to further boost its earnings.

Analysts at Motilal Oswal Financial Services had already raised their earnings estimates for FY20 and 2020-21 to factor in better traction in existing products in the US and the European Union and their price-to-earnings (P/E) multiple to 9x (from 8x earlier) to include the synergy benefits from Sandoz acquisition and improving prospects in Europe. After the clearance of Unit IV, analysts at ICICI Securities have increased their P/E multiple for the stock to 10x.

Meanwhile, after the resolution of regulatory issues of Unit IV, the company still requires to resolve USFDA issues related to Unit XI (now under warning letter) and Units VII, I, and IX, which have official action indicated (OAI) status. An OAI status means that the FDA inspection has revealed significant objectionable conditions or practices, for which action has to be taken to resolve the issues.

However, analysts say that Unit IV had remained more important, with contributions from highly complex products at stake. Also, products from other units can still be outsourced or transferred to another site, but the same is not possible for injectables and ophthalmics being produced from Unit IV.

The Street, however, will also remain watchful of any disruption of intermediate supplies due to the novel coronavirus. Analysts say for now the company has stocks that will suffice till April. A diversified portfolio and no dependence on any single product to drive sales will also be beneficial, if supply for any specific intermediate gets disrupted, they add.